Oh I knew this post would get people to come out to the confessional!

But you are right. If you want to do the P2P thing I’d keep the credit checks strict and make it only money I could afford to lose in the Variable Portfolio. But I can also see the research potential at these sites as well. If you ever wondered why credit card companies charge such high rates to riskier credit scores you can test the theory here. If you wanted to see what the crossover point is between higher interest and the risk of default on perceived credit risk that could also be tested. Then finally, you could just go the Loan Shark route and charge outrageously high interest just to see the kind of people that come by and what they want to use the money for before they rip you off. Say, does Prosper.com offer leg breaking services?

The interesting take away is how the free market system basically forced these sites to come to terms with the abusers. In a free market economy where interest rates are not being manipulated by the Fed, interest rates will find an equilibrium and those less worthy of credit will find it too expensive to borrow large sums. This acts as a protective measure. Leading up to the 2008 crash we had banks being given billions in cheap cash from the Fed and loaning it out to anyone with a heartbeat and causing a bubble. Additionally, if banks knew there was no Uncle Sam to cover them they’d be much less likely to be so leveraged and would keep higher capital reserves to protect against bad loans. Most banks have only $1 on deposit for around every $10 they loan out. So it doesn’t take much for them to go bust when people don’t pay. It’s interesting that such high leverage is what spurred on the 1929 crash with margin loans and now margin requirements are max of 50% of assets. But these limits don’t apply to the banks. It’s nice having friends in high places.

Ultimately I think the P2P lending will begin to look more and more like a bank over time and less and less like what it started out to be.

At its core, a bank is just an enterprise that encourages groups of people to keep their money there and pays them interest when the bank loans it out to other customers. The only thing P2P lending does is make you to become the loan officer and bank manager with all the attendant issues. So in that regard it is entertaining for those that want to see the risks involved in actually originating and collecting on loans. This would actually be a valuable lesson in a business class or other instance where teaching credit risk is the goal (maybe to kids?). There’s nothing like losing real money to really sink home a point.

Although I still find it odd that someone with good credit, good job, no delinquencies, etc. would ever go to one of these sites for a loan. That alone sets off a huge red flag for me.

Thanks for the comment. Keep us posted on how it is working out for you. I’d be interested in hearing about it.

Nice analysis of the P2P lenders, but extremely one-sided. I will offer an alternative viewpoint. I’ve been lending through Lending Club for about 8 months, and my experiences have been very positive. Out of about 130 loans I’ve made, I’ve had only 1 “deadbeat” so far, which is due to the fact that my screening criteria are very strict (Verified income, no prior delinquencies, steady job history, FICO score >700, etc.). Also, let’s be real – anyone coming to your website or the Diehards site is interested in investing, and likely finds it entertaining. IMO the P2P experience offers a whole lot of entertainment value. I’m not suggesting that anyone invest large chunks of money on this stuff (at least not until it’s more proven), but a few grand in the Variable Portfolio can certainly be used for this purpose. I am not expecting any “free lunch” from the experience – I am simply taking on higher risk in the hopes of higher returns, which as you mention, is not much different than investing in Emerging Markets, except that I find this to be more interesting.

BTW great job on this Crawling Road website. I really enjoy checking out your posts. I have listened to all the Harry Browne archived shows, and he’s really helped me understand the nature of our world and our government.